SEANC Asks SEC To Investigate State Pension Fees

Outside report says $30 billion 'swept into secret accounts'

An organization representing 55,000 state employees has asked the U.S. Securities and Exchange Commission to investigate “widespread potential violations of law” involving State Treasurer Janet Cowell’s handling of investments from the $87 billion state retirement system.

The State Employees Association of North Carolina also recommends legislation to curtail pervasive secrecy surrounding billions of dollars in investments; reviews by the state Attorney General’s Office, North Carolina Secretary of State’s Securities Division, and U.S. Attorney’s Office; tougher auditing of the retirement system; and IRS investigations.

“The bottom line is that $30 billion has been swept into secret accounts,” said Edward Siedle of Ocean Ridge, Fla. Siedle, founder of Benchmark Financial Services, did a preliminary forensic review of North Carolina’s Teachers and State Employees Retirement System.

“They’ve been put into the highest-price, highest-risk, least-transparent investment products ever devised in the history of Wall Street,” said Siedle, a former SEC attorney.

“State employees have taken cuts, and will have to take more cuts” because, among other things, Cowell’s investment strategy has lost $6.8 billion, Siedle said. “Taxpayers are going to have to chip in more money. This is not going to end well.”

Because the pension system is known as a defined-benefit plan, taxpayers must cover the full cost of paying benefits to retirees if the pension fund fails to deliver the returns that have been anticipated.

Substantial sums of money might be invested in a vast array of offshore holdings, and foreign countries’ regulatory laws may make it impossible to recoup investments, as happened recently to three Louisiana pension funds with investments in the Cayman Islands, Siedle said.

“At the end of the day, you may have to file a lawsuit in Patagonia” to recover unaccounted, far-flung investments, he said. “It’s far easier to lose money than it ever is to get it back.”

“This is not beating up on Janet Cowell,” Siedle said. “This is a national phenomenon that’s having dire consequences” in Illinois and Kentucky, Rhode Island, and South Carolina. It’s well known that Puerto Rico is ready to collapse its pension fund. This is a national crisis,” he added.

“The report is simply wrong. Every dollar of the pension fund is documented in the annual report, which is publicly available on the Treasurer’s website,” said Schorr Johnson, communications manager for the treasurer.

“All management fees paid for by the pension fund are disclosed on the website as well,” Johnson said. “The pension fund’s external fees have been examined by third-party experts, and found to be reasonable and within industry standards. Last year, fees represented just 0.52 percent of the fund.”

Johnson said the Treasurer’s Office will provide a detailed response to the charges in the report. The response was not available at press time.

Far from losing money, he said, the pension fund has grown more than 45 percent during Cowell’s term in office, and is the third strongest in the country.

But Ardis Watkins, director of legislative affairs at SEANC, which commissioned Siedle’s study, said it is impossible to verify many of the treasurer’s defenses because she uses a trade-secrets shield to reject requests to view details of the public investments.

State Reps. Mitchell Setzer, R-Catawba, Tim Moore, R-Cleveland, and Linda Johnson, R-Cabarrus, did not respond to questions about the bill Watkins said the lawmakers were working on.

Siedle’s report also took the state Auditor’s Office to task for failure to give proper analysis of the retirement system’s investments.

“Our office already audits the retirement system. SEANC has requested additional disclosures that would not necessarily be a part of an audit,” said Bill Holmes, spokesman for state Auditor Beth Wood.

“With that said, we are having conversations with the Treasurer’s Office about the existing retirement system audit and possible ways to change what is being done,” Holmes said.

But Siedle determined only “certain limited pension information” provided by the treasurer for inclusion in the state’s Comprehensive Annual Financial Report is audited.

Siedle’s report questions whether the Auditor’s Office’s procedures have evolved sufficiently to properly audit a retirement system whose asset allocation has risen from 5 percent to 20 percent in risky, multi-layered “alternative” investments. The Auditor’s Office was unaware those investments included real estate, credit, and inflation partnerships, the report said.

The pension money is invested “in more than 300 external funds and indirectly in hundreds more through funds of funds, with portfolios consisting of substantial illiquid, hard-to-value assets custodied all over the world,” according to the report.

Those “funds of funds” are similar to mutual funds, but rather than catering to individual investors, they require massive commitments that are possible only by large institutional investors, such as corporate or public pension plans.

General Assembly oversight of the retirement system is thwarted by incoherent treasurer’s reports to the Joint Legislative Commission on Government Operations, the report says.

Senate leader Phil Berger, R-Rockingham, and House Speaker Thom Tillis, R-Mecklenburg, co-chairmen of the Joint Legislative Commission on Government Operations, did not respond to requests for comment.

Siedle recommends the Gov Op reports be reformatted because their “disorganization, misstatements, and omissions” make it impossible for lawmakers “or anyone else for that matter” to monitor and evaluate investment performance.

The Gov Op reports “understate investment fees and expenses, as well as alternative investment percentages, and conceal significant investment underperformance against relevant passive indexes,” according to Siedle’s report.

Watkins said the Attorney General’s Office was asked to verify “whether or not the treasurer was already in violation of the law” for not complying with Senate Bill 558, a contentious 2013 law passed amid acrimonious debate, requiring the treasurer to report all fees the system pays, whether directly to a manager or indirectly by one fund manager using other fund managers.

SEANC wants Attorney General Roy Cooper to revisit an opinion he issued in 2006 that permits the trade secrets exception for investment activity.

“Attorneys with our office met with SEANC representatives at their request, but no investigation was requested, nor is there authority to initiate one,” said Cooper spokeswoman Noelle Tally.

“The Attorney General’s Office provides legal opinions at the request of government officials, and if we receive such a request to revisit the 2006 opinion, we will certainly review it,” Talley said.

Watkins said SEANC requested an SEC probe several weeks ago. A spokeswoman at the agency said it would “neither confirm nor deny the existence or nonexistence of any investigations.”

Siedle said “it is very likely” the agency will take up the North Carolina case, in part due to a recent SEC finding that unjustified fees were charged by more than half of 400 private-equity firms reviewed.

“How many of those do you think are managing North Carolina investments?” he said. It’s unlikely Cowell “miraculously picked the 50 percent that are not violating the law.”

He said he is “supremely confident” Cowell is “clueless” about where all retirement system funds go in the tangled web of hundreds of investments.

Siedle said there is “a sinister plot” by investment managers to keep their dealings veiled from public accountability by labeling them trade secrets. That includes the ability to set the value on their own products rather than use independent ratings, while Cowell willingly agreed to such dealings.

“Wall Street has sold Janet Cowell a bill of goods, and in turn she has parroted what Wall Street has told her,” he said.

Along with a full-blown audit of the retirement system, Siedle recommends removing sole fiduciary responsibility of the retirement system from Cowell. North Carolina is one of only four states with such an arrangement. He advocates “a fully transparent board” comprising lawmakers, investment experts, state employees, and retirees.

The system should end the use of placement agents — “influence peddlers” — who use their personal and political relationships to market investment products to pension systems, Siedle said. The North Carolina system unnecessarily squandered $180 million in fees to such agents, he said.

And the system should discontinue investing in local North Carolina private securities firms and corporations, he said, because that connection is “rife with opportunities for political influence peddling and dubious economic benefit.”

Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.